MJSProblem 4-32 Nominal Rate of Return Anne Lockwood, manager of Oaks Mall Jewel
ID: 2723276 • Letter: M
Question
MJSProblem 4-32 Nominal Rate of Return Anne Lockwood, manager of Oaks Mall Jewelry, wants to sell on credit, giving customers 3 months to pay. However, Anne will have to borrow from her bank to carry the accounts receivable. The bank will charge a nominal 6% and will compound monthly. Anne wants to quote a nominal rate to her customers (all of whom are expected to pay on time) that will exactly offset her financing costs. What nominal annual rate should she quote to her credit customers? Round the answer to two decimal places.
Explanation / Answer
Assume Anne's sales today is $100000
She will be getting $100000 from customers at the end of 3 months.
Her finance cost will be 6% per annum compunded monthly for $100000
The monthly interest rate = 6/12 = 0.5% per month.
The cumulative PV factor at 0.5% for 3 period = 2.97
The EMI Anne should pay = 100000 / 2.97 = $33670.03
The total interest she pays for 3 months comes to $1001.62
Annualised interest = 1001.62 *12 / 3 = 4006.28
Interest rate to be charged to customers = 4006.28/100000 = 4.01%
Note: since the inflation rate is not given, the corresponding calculations are not made.
Loan 100000 Period EMI Interest Principal Balance loan 1 33,670.03 500.00 33,170.03 66,829.97 2 33,670.03 334.15 33,335.88 33,494.08 3 33,670.03 167.47 33,502.56 (8.48)Related Questions
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